2025 (1) TMI 1553 - AT - Income Tax

Taxability of income in India - Taxability of amount received for Consulting Engineering Services as Fees for Technical Services (FTS) - HELD THAT - As decided in assessee s own case for the A.Y. 2012-13 2019 (4) TMI 605 - ITAT MUMBAI held the amount received towards consulting engineering services to be not in the nature of fees for technical services the reasoning of the departmental authorities with regard to cost recharge would also fail since they have treated it as ancillary and incidental to consulting engineering services. The contention of the learned Departmental Representative that the cost recharge fails various tests such as need test benefit test etc. is unacceptable it is contrary to the finding of the Departmental Authorities. Once the Departmental Authorities have treated the amount received towards cost recharge to be in the nature fees for technical services it implies rendering of service by the assessee. Therefore applying the very same reason on the basis of which we have held the amount received towards consulting engineering services to be not in the nature of fees for technical services as discussed above we hold that the amount received towards cost recharge cannot be brought to tax in India in the absence of PE. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal pertain to the taxability of certain receipts of the appellant company under the Income Tax Act, 1961 and the India-UK Double Taxation Avoidance Agreement (DTAA). Specifically, the issues are:

1. Whether the amount received for consulting engineering services qualifies as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Act and Article 13 of the India-UK DTAA.

2. Whether the amount received as management fees and cost recharge can be characterized as both Royalty and Fees for Technical Services under Section 9(1)(vi) and 9(1)(vii) of the Act and Article 13 of the India-UK DTAA.

3. Whether the tax rate applied by the Assessing Officer (AO) and Dispute Resolution Panel (DRP) of 15% as per the India-UK DTAA is erroneous, and a lower beneficial rate under the Act should apply.

4. Whether the consequential interest levied under Sections 234A and 234B of the Act is justified.

Issue-wise Detailed Analysis

1. Taxability of Consulting Engineering Services as Fees for Technical Services (FTS)

The relevant legal framework includes Section 9(1)(vii) of the Income Tax Act, 1961, which taxes Fees for Technical Services, and Article 13 of the India-UK DTAA which defines the scope of Royalty and Fees for Technical Services. The pivotal interpretative provision is Article 13(4)(c) of the DTAA, which defines FTS as payments for rendering technical or consultancy services that either (a) are ancillary to the application or enjoyment of rights or property, or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of a technical plan or design.

The appellant company argued that the amounts received for consulting engineering services, specifically for technical designs, drawings, and plans, do not constitute FTS because these services do not "make available" any technical knowledge, skill, or processes to the Indian recipient. The appellant relied on the principle that "making available" requires that the recipient be able to independently use the technical knowledge or skill without further assistance from the service provider. The supplied designs and drawings were project-specific and could not be reused by the Indian entity independently in other projects.

The AO and DRP contended that the second limb of Article 13(4)(c) treats development and transfer of technical plans or designs as FTS regardless of whether technical knowledge was made available. However, the Tribunal rejected this interpretation, holding that the phrase "or consists of the development and transfer of a technical plan or technical design" must be read in conjunction with the requirement of "making available" technical knowledge, skill, or processes, applying the rule of ejusdem generis (words of the same kind). Therefore, mere transfer of technical designs without making available technical knowledge or skill does not qualify as FTS.

The Tribunal further applied settled legal principles that technology or technical knowledge is considered "made available" only if the recipient can independently use it without reliance on the service provider. Since the designs were project-specific and not reusable, the appellant did not make available technical knowledge or skill. The burden to prove otherwise rested on the Department, which failed to provide evidence. The Tribunal also referred to a precedent where architectural drawings were held not to constitute FTS absent transfer of technical expertise.

Consequently, the amount received for consulting engineering services was held to be business income, not FTS, and not taxable in India in the absence of a Permanent Establishment (PE).

2. Taxability of Management Fees and Cost Recharge as Royalty and Fees for Technical Services

The appellant challenged the characterization of management fees and cost recharges as both Royalty and FTS. The management fees related to centralized services such as IT, business development, finance, human resource management, legal, operations, and project management functions provided at the group level. The appellant submitted these services did not involve making available any technical knowledge, skill, or processes to the Indian entity and thus did not fall within Article 13 of the DTAA, which covers only technical and consultancy services.

The AO treated the cost recharge as Royalty under Section 9(1)(vi) of the Act and Article 13 of the DTAA, reasoning that the recharge was for use of the trademark or brand name and industrial, commercial, or scientific experience. It also held the amount to be FTS under Section 9(1)(vii) and Article 13 as consultancy services.

The Tribunal analyzed the nature of the services and found that the management and common cost recharges were ancillary and incidental to the consulting engineering services. Since the consulting engineering services were held not to be FTS, the ancillary cost recharges could not be treated as FTS or Royalty either. The Tribunal rejected the Department's reliance on need test or benefit test arguments, emphasizing consistency with the decision on consulting engineering services. It held that in the absence of PE, such receipts are not taxable in India.

3. Application of Tax Rate

The appellant contended that the AO erroneously applied a 15% tax rate as per the India-UK DTAA, whereas a beneficial rate of approximately 10.6% under the Act should apply. However, since the Tribunal held that the receipts in question do not constitute taxable FTS or Royalty income in India, the issue of applicable tax rate became infructuous and was dismissed.

4. Levy of Interest under Sections 234A and 234B

The appellant challenged the levy of consequential interest under Sections 234A and 234B of the Act. The Tribunal observed that since the interest was consequential to the tax demand, and the taxability itself was negated, the issue did not require separate adjudication. The ground was dismissed as not requiring further consideration.

Additional Observations and Precedents

The Tribunal noted that the appellant's case was squarely covered by its earlier decisions for assessment years 2012-13 through 2020-21, where identical issues were decided in the appellant's favor. The lead order for AY 2012-13 provided detailed reasoning rejecting the characterization of consulting engineering services and cost recharges as FTS or Royalty. The Tribunal emphasized the principle of consistency and followed the earlier decisions, noting that the facts and grounds remained unchanged.

The Tribunal also referred to a decision from the Pune Bench involving the India-USA DTAA, which has a similarly worded provision on FTS, where it was held that mere passing of project-specific architectural drawings does not amount to making available technical knowledge or skill.

The Department's reliance on pending appeals before the High Court and other decisions was found factually distinguishable or insufficient to overturn the Tribunal's consistent view.

Significant Holdings

"The words 'or consists of the development and transfer of a technical plan or technical design' appearing in the second limb has to be read in conjunction with 'make available technical knowledge, experience, skill, knowhow or processes'. The reasoning of the Assessing Officer that the second limb of Article-13(4)(c) of the India-UK tax treaty has to be read independently cannot be the correct interpretation of the said Article."

"Technology is considered to have been made available when the recipient of such technology is competent and authorised to apply the technology contained therein independently as an owner without depending upon the service provider. The recipient should be able to use the technical knowledge, experience, skill, knowhow or processes by himself in his business or for his own benefit and without recourse to the service provider in future."

"The technical designs/drawings/plans supplied by the assessee to the Indian entity are project specific, hence, cannot be used by the Indian entity in any other project in future. Therefore, the claim that no technical knowledge, experience, skill, knowhow or processes has been made available is accepted."

"In the absence of a Permanent Establishment in India, the amount received by the assessee towards consulting engineering services and cost recharge cannot be brought to tax in India."

"The cost recharge amounts, being ancillary and incidental to consulting engineering services, cannot be treated as Royalty or Fees for Technical Services."

"The issue of tax rate becomes infructuous once the receipts are held not taxable."

The Tribunal thus concluded that the amounts received by the appellant for consulting engineering services and management fees/cost recharges do not constitute Fees for Technical Services or Royalty under the Income Tax Act or the India-UK DTAA. Consequently, in the absence of a Permanent Establishment in India, such income is not taxable in India. The appeal was allowed accordingly, and consequential interest demands were dismissed as infructuous.